Budget 2013: What it means for investors, consumers, India Inc and economy

Mar 01, 2013, 03.03 PM IST

What this Budget means for investors, consumers, India Inc and economy

Text: ET Bureau

A lower transaction cost will boost stock volumes, but a sustained surge in the Sensex depends on investors trusting Budget numbers and FIIs facing no tax hassles. The Budget will be hard on the super rich. That fancy car, the sexy yacht and the racy bike will all cost more even as they pay more tax on their income.

In times of austerity, the Finance Minister has tried to boost growth by incentivising savings and investment while creating ground for lower interest rates. Chidambaram has announced a number of steps which have the potential to increase the flow of risk capital in the direction of ventures that are in the earliest stages of their life.

The Budget is big on announcements, but it has to be followed by big-ticket reforms from both the Centre and states to deliver the goods and improve the ground situation. P Chidambaram has done a tightrope walk. He has offered sops like the investment allowance, but also raised effective tax rate through a hike in surcharge.

Here are the measures that the Finance Minister has announced and their impact on respective segments.

1/8

BCCL

Breaking down the Budget for investor

Tax on income from debt MFs

Measure: The tax has been raised to 25% from 12.25% for distribution made to individuals and HUFs

Impact: Till now, investors used a tax arbitrage route. They parked more savings in debt MF schemes and less in fixed deposits. The higher tax is aimed at discouraging this practice and increasing the flow of deposits into banks which badly need them

More choice for retirement funds

Measure: Pension and provident funds can put a slice of their corpus in ETFs, debt mutual funds and assetbacked securities

Impact: While smart managers can use this flexibility to raise returns on retirement funds, MFs will be better placed to handle redemption. At present, investment options for these funds are well defined and the labour ministry is opposed to the proposal to allow PFs to invest in stocks

Breaking down the Budget for economy

Impact: Will lower borrowings, narrow current a/c deficit & cool inflation. Could lead to a stronger Rupee, lowering import bill, especially imported crude oil. All these could feed into the system and help control inflation

Impact: Inflation-linked bonds will help people shift out of gold into financial savings, providing liquidity to markets and cheaper credit for investments. Higher growth will lead to the creation of additional jobs and the reduction of poverty

Follow the money

Measure: More capital for PSBs, push to fi nancial inclusion, a bank for women and boost to insurance sector

Impact: Strong banking and financial sectors will lead to more liquidity, prompting higher investments and growth

Three promises

Measure: A Nirbhaya Fund to empower women, funds to train youth and cash transfers for the poor

Impact: Could have a huge impact on poverty reduction and the spread of welfare benefits across the country

Investment triggers

Measure: CCI to monitor major investment proposals. Any fi rm investing over Rs 100 crore in plant and machinery will get a tax incentive of 15% of investment in addition to depreciation.

Impact: India’s economic growth is largely consumption driven. A boost to investments will lead to higher and more balanced growth that will also not be inflationary.

Cash in hand

Measure: Direct transfer of cash to the poor for pensions, scholarships, maternity benefits

Impact: Effective delivery of benefits to the intended recipients. Will place cash in the hands of people, raise quality of lives and increase choice

4/8

Breaking down the Budget for new economy

Impact: It will create new pools of domestic capital required to nurture early-stage entrepreneurship. This has, for long, been a huge gap in the Indian entrepreneurial ecosystem. Technology startups will benefit.

A fab deal for chip-making

Measure: Duty waiver to import plants and machinery that will help build semiconductor fabrication units

Impact: Will help boost the domestic electronics manufacturing eco system. It could also possibly attract the multinational semiconductor manufacturers to set up their base in India, a country they have avoided so far

Listing without an IPO

Measure: SMEs, including start-ups, permitted to list on the SME exchange sans IP

Impact: Will allow greater liquidity, and bring down listing costs down the line for MSMEs and could help boost investment

Fund for innovations

Measure: A Rs 200 crore fund to back cos building S&T products

Impact: It will fuel innovation and encourage young companies to bring-to-market new products

Local push for set-top boxes

Measure: Customs duty on imported set-top boxes doubled to 10%

Impact: Spur local manufacturing of set-top boxes, one of the fastest-moving electronic goods in India. Set-top boxes represent a huge market of $2 billion over the next two years

Tax help for angel groups

Measure: Angel Investors who pool funds and register with Sebi get tax pass through

Impact: The measure will lead to a significant increase in risk capital available for very early stage companies that are looking for “smart money”

5/8

Breaking down the Budget for business

Impact: This will help raise low-cost funds for infra projects, which have a long gestation period. The government wants to spend $1 trillion, in which private investment would be 47%, on infrastructure in the 12th plan.

Thrust on PPP in coal mining, policy soon

Measure: Public Private Partnerships to help boost supply of coal to power producers and other consumers.

Impact: This will help reduce coal scarcity. Coal India Chairman Narsing Rao says the company can award 2-3 large projects of 4-5 MT likely in 2013-14 for contracts of 10-12 years. In the next phase, CIL would like to award bigger projects involving production of 20 million tonnes of coal.

New industrial corridors

Measure: Corridors from Bengaluru to Chennai and from Bengaluru to Mumbai

Impact: This may usher in a new wave of industrialisation and urbanisation that will accelerate growth.

Measure: Government to award contracts for 3,000 km of roads by September, and set up a regulator for the sector.

Impact: A regulator will help resolve numerous disputes between contractors and authorities, and speed up clearances. New contracts will give a boost to road builders as they are starved of contracts in the fiercely competitive sector, but the target is ambitious for the government that could award only 878 km in the first nine months of this fiscal.

6/8

Breaking down the Budget for India Inc

Leg up for investments

Measure: Firms can claim allowance of 15% on investment of over Rs 100 cr in new plant and machinery

Impact: The tax break, over and above depreciation, will encourage investment by brick & mortar companies, kickstart revival and spur growth. However, companies in the services sector will not gain from the benefit

Tougher to claim tax breaks under treaties

Measure: Producing a Tax Residency Certifi cate is not enough for foreign investors to escape tax. Taxmen could still come calling

Impact: Spooked the market. It’s a worry for companies that receive interest and royalty income as taxmen will seek information on beneficial ownership. Companies making capital gains from sale of shares need not lose sleep. But it’s not clear how this would work for investors from Mauritius.

A big relief for foreign investors

Measure: General Anti-Avoidance Rules put off by two years till April 2015

Impact: Taxpayers can breathe easy for now, but worries on its implementation to curb sharp tax practices remain

Impact: Will curb tax avoidance, but taking out cash from India will become more expensive

Cheer for select funds

Measure: Alternative Investment Funds will not have to pay tax on income as they get pass-through status

Impact: The tax benefit is limited to some categories. Other Alternative Investment Funds such as infrastructure funds and social sector funds not eligible for specific exemption. However, they may still claim pass-through status based on general law

Pay more for technology

Measure: Non-residents to pay more tax on royalty & fee for technical services

Impact: Technology imports could become more expensive. May encourage treatyshopping

7/8

Breaking down the Budget for business

Overall tax rates stable

Measure: Peak rate for Customs, standard rate for excise duty and service tax retained at current level

Impact: Relief for industry which was apprehensive that a revenue-constrained government may increase duty rates and dampen demand

Stricter punishment for customs evasion

Measure: Evasion of customs duty of more than Rs 50 lakh to be a non-bailable offence

Impact: Empowers enforcement agencies to tackle smuggling more effectively but could lead to increased harassment by customs authorities

Amnesty for service providers

Measure: Amnesty Scheme for those who failed to pay taxes in last 5 years

Impact: Move could provide onetime boost to government revenues and result in speedy settlement of outstanding disputes.

Crackdown on service tax evasion

Measure: Company offi cials found guilty will have to pay penalty from their own pocket

Impact: This measure could improve compliance but will result in charges of harassment, and increase litigation

Housing cos to face higher service tax

Measure: Effective service tax rate to go up on homes above Rs 1 crore or more than 2,000 square feet

Impact: Cost of housing to go up in metros. Effective impact on home prices will be 0.6%.

Good news for garment makers

Measure: Zero-duty regime brought back for branded readymade garments

Impact: Price of readymade garments to fall by about 3%. A branded shirt priced at Rs 1,250 will now cost around Rs 1,212